It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation.
The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect.
I get two very bad impressions about where we’re going. Geithner and the Administration generally probably haven’t come to any substantive conclusions about what needs to be done. Therefore, they are going to continue down pretty much the same road laid out by Paulson and Bernanke and probably in a similarly ad-hoc manner. Which is not particularly encouraging.
The most important issue in making this work will be getting private capital to take the dubious assets off the banks’ balance sheets. It appears to me that the lending terms will be generous enough to make that happen, but we don’t know all the details yet.
Despite the insistence on transparency, one wonders if investors will be offered a better deal than taxpayers will be led to think. More forthright approaches--including nationalisation--might end up costing taxpayers less, but the administration has apparently decided that they would be much harder to sell. And Mr Geithner's assurance that his scheme will "help provide a market mechanism for valuing assets" is puzzling. The terms of the guarantees or subsidies attached to the toxic assets will decide what they are worth--and what this new plan, once it has been worked out, is really going to cost.
The new rescue plan for the banking sector, outlined by Secretary Geithner today, employs a broad range of tools. There is one excellent feature, the inclusion of an improved version of capital infusions into banks, and one troubling proposal, for a “bad bank” that would operate as a public/private partnership. The bad bank, which will be fleshed out over the next several weeks, will be extremely tricky to design effectively. At best, it will be modestly inferior to the solution of providing a guaranteed floor value for toxic assets without requiring banks to sell them to gain the protection. At worst, the plan may fizzle by failing to achieve a large volume of purchases or may prove considerably more expensive for taxpayers than anticipated.
[Raising the confidence of capital markets sufficiently to get investors to buy the banks' toxic assets] presupposes there's enough private investment capital still out there to do all this. But where is it? Some at Treasury tell me that they're counting on hedge funds. But that's merely exchanging one form of opaque financing (the old TARP) for another (hedge funds' black boxes). It's a dangerous gamble because hedge funds could fall apart just as quickly as other parts of the financial system have failed. Maybe they already have, for all anyone knows. They're secret, remember?
Or maybe the additional financing will come from China, Japan, and the Middle East. (It seems likely that some hedge fund financing is already coming from rich Arabs.) But why exactly would Asia or the Middle East be willing to commit even more money to the United States when they're already nervous about their US loans and investments, and when their own economies are under more and more stress?
(Photo: Paul J Richards/Getty.)